Managed accounts about to enter centre stage

The operation of managed accounts looks set for an overhaul in a post-FOFA world in light of the proposed regulatory changes canvassed in ASIC’s recent consultation paper CP200 (8 March 2013). Overall, any regulatory measure that improves transparency and clarity around discretionary investment management services should foster their development and raise investor confidence in appropriately authorised operators and advisers.

ASIC’s guidance and relief in various key areas has not been substantially reviewed since it was first implemented in 2004 to address such discretionary client arrangements, following the introduction of various Financial Services Reform measures in 2002.

Managed accounts never really fitted the revised ‘managed investment scheme’ framework and as such, their operation relied upon ASIC class order relief from various product related aspects of the Corporations Act. The idea of regulating services that try to achieve similar client outcomes (i.e. discretionary client investment management) under similar regulatory arrangements is certainly a positive, irrespective of the toolbox being used to implement the ‘service’.

ASIC review is timely given the impending introduction of key FOFA measures

The review is timely given the impending introduction of key FOFA measures in practice from 1 July 2013 and the decoupling of product and advice services. One key element in the plan is to regulate situations where advisers/licensees were operating limited power of attorney arrangements for making discretionary investment changes within a regulated platform (IDPS) as an MDA service.

This means some platforms may withdraw this type of discretionary service for advisers due to the additional licensing requirements imposed to operate and provide advice on MDAs. The practical impact of removing the current no-action positions remains to be seen.

MDA services by their implicit design are a very efficient way of delivering portfolio management to a client in a post FOFA world and we expect further growth in this form of advice and service delivery. More discussion and clarification is certainly required around services that offer both ‘client owned’ and ‘custodially held’ discretionary investment arrangements to see what requirements will apply. For example, presumably the financial requirements that apply are simply the highest under all circumstances.

Introducing NTA requirements for MDA Operators – more onerous on smaller providers

Introducing NTA requirements for MDA Operators will make it more onerous for smaller providers to become ‘operators’. This could encourage larger operators to simply badge services for MDA advisers, where it appears such higher NTA requirements don’t apply for a MDA Adviser.

However, advisers will still need to be specifically authorised to be MDA Advisers under their licence but apparently with no additional capital requirements. We may also see some restructuring of the way fees are charged as some MDA operators bundle up fees for a range of different services and this may impact on their final NTA requirements.

While there is the concept and consideration of ‘incidental custodian’ requirements under ASIC CP194, which draws a distinction between full custody services, there is no such idea envisaged yet for MDA operators within CP200. The NTA requirements for MDA operators are greater than that proposed for incidental custodians and this seems overly onerous.

While operators should have necessary experience and qualifications to run such schemes this is different to the NTA issue. Consideration should be given to excluding client assets and associated revenue from the NTA calculations where other licensed entities (with the appropriate capital backing) provide MDA administration support services to the MDA Operator.

One of the fundamental measures for MDA services currently is the requirement to assess the ongoing suitability of the MDA contract for the client at least once every 13 months, either by the MDA operator or an external MDA adviser. Consideration should be given here to removing the FOFA opt-in provisions for MDA clients, as these are an unnecessary overlay for MDA clients who are already subject to a higher level of disclosure and reporting obligations.

While the regulatory review should also provide some clarity for the operation of individual discretionary services, it should also remove debate over which operating structure (e.g. MDA, IMA, SMA or platform) is best suited to providing them.

The current ASIC proposal will be a substantial change for current participants but in the longer-term it has the potential to see MDA services being the preferred method of discretionary management.

About Tim Wedd

Tim Wedd is executive director of Crystal Wealth Partners. He has over 26 years practical experience encompassing specialist technical, consulting and financial planning roles for institutions including Aviva, AXA, AMP, Colonial, ING and HSBC as well as private client practices.

He is a former Director of the specialist SMSF and investment administration business Multiport (acquired by AXA) and a former Director and Chairman of the Australian Retirement Income Streams Association (ARISA), which merged with the Financial Services Council of Australia in 2002.

For over a decade, Tim led the specialist technical education and consultancy practice Financial Essentials.